Bank of Japan board member Koeda says core inflation is already around 2%

Bank of Japan board member Koeda said core inflation is already around 2% and the central bank needs to continue raising interest rates, warning that developments in the Middle East could push inflation above the target in the future.

summary:
All points contained in the public statements of BOJ Board Member Koeda, on May 20, 2026:

• Core inflation is estimated to be around 2% already, with some potential to exceed this level given the situation in the Middle East.
• The Bank of Japan needs to continue raising interest rates at an appropriate pace, balancing inflation concerns with economic trade-offs.
• Developments over the past month or two have increased the likelihood of a risky scenario in which high crude oil prices continue
• Some survey-based and market-based indicators of long-term inflation expectations have already risen, which Koeda said is worth paying attention to.
• If real interest rates continue to deviate significantly in a negative direction from the natural rate, unintended distortions in resource allocation may arise in the future.
• The Bank of Japan’s approach to policy normalization will depend on factors including the size of the output gap and the stability of the natural interest rate.
• If the economy avoids a major downturn, more attention should be paid to the side effects of further declines in real interest rates, Koeda said.

Bank of Japan Board Member Koeda offered a hawkish assessment of Japan’s inflation outlook on Wednesday, saying core price growth has already reached around 2%, and argued that the central bank needs to push ahead with more interest rate hikes to address inflation risks.

Speaking publicly, Koeda said the Bank of Japan needed to continue raising interest rates in response to developments in economic activity, prices and financial conditions, framing the case for tightening not as a question of whether it is possible, but of pace and timing. The comments come a day before Japan’s nationwide CPI release in April and sharpen the focus on the Bank of Japan’s June meeting.

On inflation expectations, Koeda’s assessment was remarkably direct. He added that the core inflation rate is already about 2%, and given the situation in the Middle East, there is some possibility for it to rise above this level in the coming period. He pointed out that the developments that occurred over the past month or two have increased the likelihood of a risk scenario in which high crude oil prices continue, as supply and demand dynamics indicate that price pressures could expand to include a wide range of goods and services. Survey-based and market-based indicators of long-term inflation expectations have already risen, a development he said deserves close attention.

Koeda’s real interest rate argument was perhaps the most technically evident element of his remarks. He said that if the Bank of Japan does not adjust interest rates in response to rising inflation or inflation expectations, real short-term interest rates will fall further into negative territory. If this deviation from the natural interest rate continues and expands, unintended distortions in future resource allocation become a material risk, an argument that reframes inaction as a policy choice with its own costs rather than a neutral position.

Koeda acknowledged the trade-offs involved, noting that the BOJ’s approach to normalization will depend on factors including the size of the output gap and the stability of the natural rate. But the general trend was clear: in the absence of a major economic contraction, the side effects of lower real interest rates require increased attention, and the case for continued monetary tightening remains sound.